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What is the firm''s optimal capital budget

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Reference no: EM131028883

The managers of United Medtronic are evaluating the following four projects for the coming budget period. The firm's corporate cost of capital is 14 percent.

  Project Cost  IRR

A $15,000       17%

B 15,000         16

C 12,000         15

D 20,000         13

a. What is the firm's optimal capital budget?

b. Medtronic managers want to consider differential risk in the capital budgeting process. Project A has average risk, B has below-average risk, C has above-average risk, and D has average risk. What is the firm's optimal capital budget when differential risk is considered? (A Hint: The firm's managers lower the IRR of high-risk projects by 3 percentage points and raise the IRR of low-risk projects by the same amount.)

Reference no: EM131028883

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